What is a search fund?
What is a search fund and how does it work?
A search fund functions in a similar way to venture capital funds and PE funds where the fund manager raises capital from investors and deploys it into companies with the goal of creating a liquidity event. However, the execution of the approach is much different. The fund searches for companies to acquire, which are usually legacy small business with strong metrics. Once the company is identified, the fund acquires the company and installs new leadership with an ambitious plan to scale the business. After holding the company for some time (typically 5+ years), the fund typically pursues a liquidity event via an exit.
Here are some additional thoughts on search funds. Enjoy!
Search Fund
An investment vehicle through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, grow, and exit companies usually struggling with succession. For the investor, the traditional returns are to generate a 3x-5x MOIC in 3 to 5 years. The basic acquired company strategy is to double revenue and improve margins within 5 years. The returns on a single search fund acquisition investment are not to return the entire fund like traditional VC investments. This is because the investor is not taking the same level of risk as you would making traditional VC investments.
Search Funds are a hybrid investment that has VC and PE traits. PE being you acquire an already profitable company with leverage. VC being you are shepherding an entrepreneur through their search journey and syndicating the acquisition with several investors (typically 10 to 15).
Typically search funds have two phases: (1.) A Search Phase and (2.) The Company acquisition and growth Phase. An entrepreneur / searcher can self-fund their search phase (which typically last 2 years) or raise investment capital to fund the search which typically ranges from $500K to $1MM. For every one dollar invested in the search entity, it converts into $1.25 to $1.50 invested into the acquisition. This is termed a “step-up” to account for the additional risk as searchers do not always close on an acquisition. Search entity investors then have the right to invest prorata into the acquisition. If an equity gap exists, the entrepreneur can raise outside capital to acquire the company.
Please see the following links for more information:
• https://www.searchfund.org/
• https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds
Search Fund
An investment vehicle through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, grow, and exit companies usually struggling with succession. For the investor, the traditional returns are to generate a 3x-5x MOIC in 3 to 5 years. The basic acquired company strategy is to double revenue and improve margins within 5 years. The returns on a single search fund acquisition investment are not to return the entire fund like traditional VC investments. This is because the investor is not taking the same level of risk as you would making traditional VC investments.
Search Funds are a hybrid investment that has VC and PE traits. PE being you acquire an already profitable company with leverage. VC being you are shepherding an entrepreneur through their search journey and syndicating the acquisition with several investors (typically 10 to 15).
Typically search funds have two phases: (1.) A Search Phase and (2.) The Company acquisition and growth Phase. An entrepreneur / searcher can self-fund their search phase (which typically last 2 years) or raise investment capital to fund the search which typically ranges from $500K to $1MM. For every one dollar invested in the search entity, it converts into $1.25 to $1.50 invested into the acquisition. This is termed a “step-up” to account for the additional risk as searchers do not always close on an acquisition. Search entity investors then have the right to invest prorata into the acquisition. If an equity gap exists, the entrepreneur can raise outside capital to acquire the company.
Please see the following links for more information:
• https://www.searchfund.org/
• https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds